Softer CPI Shifts Rate Outlook

• Australia’s Q2 CPI came in softer than expected, with headline inflation rising 0.6% q/q (vs 0.7% expected) and trimmed mean inflation at 0.8% q/q (vs 0.9% expected). Both measures also came in below the RBA’s May forecasts, reinforcing that underlying inflation pressures continue to gradually ease.
• The softer CPI print saw markets abandon expectations of another RBA rate hike this year. Australian bond yields rallied as investors pared back tightening expectations and shifted towards a prolonged hold.
• The Federal Reserve left rates unchanged, although the decision was split 9-3, with three members voting for a 25bp hike. Despite Chair Kevin Warsh reaffirming the Fed’s commitment to its 2% inflation target, short-end Treasury yields fell as markets took the decision as less hawkish than expected.
• Renewed tensions in the Middle East pushed Brent crude higher to $91/bbl, after attacks involving Iran disrupted sentiment and US commercial crude inventories fell by 7.2 million barrels, the largest weekly draw since mid-June. The movements reversed some of this week’s sharp decline in oil prices.